Companies proposing to merge must remain separate and independent during thegovernment’s investigation. These two competitors did not... As a result both companies are paying substantial civil penalties and Flakeboard is being forced to surrender the ill-gotten profit it gained from violating the antitrust laws.1 

Bill Baer

Assistant Attorney General of the Department of Justice's Antitrust Division

Summary

The United States Department of Justice (DOJ) has announced a proposed settlement with Flakeboard America Limited (Flakeboard) and SierraPine for alleged “gun jumping” that occurred during the waiting period of their proposed – and eventually abandoned – transaction, as prescribed under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Act).  The proposed settlement requires Flakeboard and SierraPine to pay $4.95m and implement antitrust compliance programs.  This is the first gun jumping action brought by the DOJ since its 2010 complaint against Smithfield Foods, Inc. and Premium Standard Farms, LLC, and underscores the US antitrust agencies’ continued attention towards parties’ activities prior to closing an HSR-reportable transaction. 

Details of the case

Flakeboard and SierraPine entered into an asset purchase agreement on January 13, 2014, and filed an HSR notification shortly thereafter.  Under the terms of the agreement, Flakeboard would have acquired three of SierraPine’s mills located in Oregon and California that produced medium-density fiberboard (MDF), a product area in which the parties directly competed.  The parties faced DOJ concerns that the transaction would have likely resulted in anticompetitive effects on the sale of MDF and ultimately walked away from the deal.

HSR Act violation

The DOJ alleges that, while the transaction was under review, the parties coordinated the closing of a SierraPine mill and the transfer of SierraPine’s customers to Flakeboard before the waiting period expired.  The coordination involved (i) sharing competitively sensitive information, (ii) coordinating on the closure announcement, (iii) Flakeboard’s direction of SierraPine’s communications with SierraPine customers, and (iv) encouraging SierraPine employees to direct customers to Flakeboard through the assurance of future employment.  The DOJ asserts that such conduct rose to the level of operational control, effectively giving Flakeboard beneficial ownership over SierraPine’s business.

The waiting period prescribed by the HSR Act is intended to preserve the independence of parties during the reviewing agency’s investigation into a proposed transaction.  During this time, the parties may not close the transaction or transfer control.  By engaging in the alleged coordination and establishing Flakeboard’s beneficial ownership, the parties had “gun jumped” the waiting period in violation of the HSR Act.  Under the HSR Act, gun jumping can result in penalties of up to $16,000 for each day the violation occurred.

Sherman Act violation

In addition to gun jumping, the DOJ alleges that the parties’ coordination violated Section 1 of the Sherman Act.  During the waiting period, parties to a transaction are required to operate as independent competitors.  However, DOJ alleges that during the waiting period in the Flakeboard/SierraPine transaction, the parties coordinated the reduction of output by closing a  SierraPine mill and allocating customers to Flakeboard.  Such coordination is a per se violation of Section 1.

Settlement

Ultimately, the proposed settlement requires Flakeboard and SierraPine to each pay $1.9m in civil penalties under the HSR Act.  In addition, the settlement requires Flakeboard to disgorge $1.15m in profits it earned as a result of its alleged unlawful coordination with SierraPine in violation of Section 1.  The proposed settlement also requires the parties to implement an antitrust compliance program to ensure that the parties comply with the Final Judgment. 

Practical Highlights

The DOJ’s action against Flakeboard and SierraPine is a strong reminder that US antitrust authorities regard gun jumping as a serious issue.  The proposed settlement is notable for being the first DOJ settlement to contain disgorgement in the context of alleged gun jumping activity.  The DOJ’s $4.95m settlement is significantly higher than the $900,000 settlement reached in United States v. Smithfield Foods, Inc. and Premium Standard Farms, LLC in 2010, although both settlements are well below the maximum penalty the DOJ could have sought.2 The DOJ noted that a lower penalty was appropriate in the Flakeboard/SierraPine settlement due to the parties’cooperation with the DOJ’s investigation.  

While the US antitrust agencies recognize that merging parties have a legitimate interest in certain forms of coordination, such coordination must be done carefully to ensure that the parties maintain separate identities and compete in the marketplace until the transaction closes.  Merging parties must consider how much information can be shared in due diligence and transition planning, and the amount of control that the acquiring company can exert contractually or otherwise over the other party prior to closing.  Companies should work with their counsel early in the transaction process to implement clear guidelines and ensure compliance with US antitrust laws.